One of the many attractive aspects of owning a credit card is that you don’t have to pay the full tab every month. Send the minimum payment due and you’re good-to-go for another month.
And most consumers take advantage of that. The Federal Reserve Board says that only 45% of American consumers pay off the balance of their credit card every month. That means that more than half of us are chasing a balance month-to-month.
But what happens if you can’t muster even the minimum monthly payment on your credit cards?
Maybe you unexpectedly lost a job. Or suffered a medical emergency that requires a few days in the hospital. Or faced a massive car repair bill and don’t have an emergency fund to bail yourself out.
Minimum payments, after all, are only 2%-3% of the total balance. So, if you owe $1,000 on your cards, we’re talking $20-$30 a month to make a minimum payment.
That could be the case, but if you’ve been using credit cards to fund a lifestyle you suddenly can’t afford, the balance is probably closer to the April 2019 national average of $6,348.
That means your minimum payment due is more in the $150-$200 range and that kind of payment isn’t just difficult for someone struggling, it may be impossible.
This might feel like the time to push the panic button and take drastic measures like debt settlement or declaring bankruptcy, but slow down. There are ways to lower your credit card payments and maybe even stop paying credit cards legally.
Don’t Skip Because You Can’t Make the Minimum Payment
Credit card companies make money by keeping customers, not by chasing them down to get court settlements against them. They will take your call and try to work with you.
As soon as you know you’re in trouble, start working on a plan can call your card company. In as few words as possible, tell them how you got in trouble and how you plan to get out.
If you have proof that you can solve this problem – a realistic budget, a job offer, money in an account – make it available to them.
Ask for time and clemency – please waive late fees while I get my act together! – and time to re-organize your budget and get enough income to pay down the debts.
Remember: Credit card companies want you to succeed. They hope you won’t fail.
Paying Less Than the Minimum
This is not the ideal approach, but it beats doing nothing. Creditors won’t like it, but neither will they refuse your payments. They probably will call you and try to intimidate you into paying more, but pay what you can and ignore the phone calls.
Offer to make small, weekly payments of any amount you can afford. If you have family or friends that will help out, ask them for small loans and send the money directly to the card companies so that you can show you’re being proactive about this situation.
When it comes to repaying a loan, something always is better than nothing.
Talk to Your Creditor
It is hard to have sympathy for your situation if you won’t communicate the problem. As mentioned several times, card companies want your business. They want to find ways to keep you in the family.
Put another way: They want to talk to you.
So, give them a call. Be courteous. Be honest. Don’t try to turn things around and blame them for harassment. You’re the one who didn’t pay. Offer them a plan that sounds both encouraging and doable.
Show them a new budget you’ve drawn up. Tell them of any efforts you’ve made to increase your income. Explain how you plan to cut expenses. If possible, promise them you’ll have at least the minimum payment next month.
What Can Happen If You Skip the Payment
The immediate impact of skipping a payment is having a late fee, usually $25-$35, added to your balance. That may not seem like much until you’ve missed three or four payments and suddenly are out $100 with nothing to show for it.
Combine that with the fact that card companies can raise the interest rate on your card balance if you’re more than 60 days late with a payment and suddenly, you owe a lot more than you did last month, even if you stopped using the card!
Don’t forget the impact on your credit score. It’s all bad. Your score tumbles and for the next seven years, lenders know you skipped payments. That could affect their decision on whether to give you a loan sometime in the future and the interest rate they will charge on that loan.
Know Your Payment Policies
Missing payments will not make you popular with card companies, but it doesn’t mean you should be a target for abuse or harassment. The Credit Card Accountability and Disclosure Act (CARD Act), was passed to give consumers some protection in both of those areas.
Credit card companies are permitted to raise your interest rates if you are 60 days or more late with payments, but the CARD Act stipulates that you must be notified 45 days before a rate change takes effect. If your interest rate was raised and you make six consecutive months of on-time payments, the card companies must go back to the original interest rate.
If you decide to put your card away while trying to catch up, the card company can’t penalize you by assessing an inactivity fee.
Prioritize Your Bills & Budget
Unfortunately, most American consumers can’t tell you how much they have coming in every month and where it’s going out. We don’t budget, most of us, anyway. Surveys show what only 41% of consumers use a budget and even that number may be high.
If you want to devote money to paying off credit cards, it has to come from somewhere and that somewhere will show up on a budget.
The first move in making a budget is to prioritize your spending. You must have these four and a half things at the top of the list:
- Clothing (to a very small degree)
All other spending is optional, meaning you can learn to live without it. That includes money wastes like cable TV; restaurant/entertainment nights out; cellphone service; buying new instead of used cars; bottled water; and clothing (to a very small degree).
Next, decide how much money you have available each month – based on your budget – and commit it to making the minimum payment on all cards, but prioritizing the order in which you want to pay off the cards.
The biggest money saver comes from attacking the card with the highest interest rate. That strategy, however, may take you the longest to pay off your credit card debt and you could get discouraged too easily.
If that’s the case, put your money toward the card with the lowest balance. When that is paid, use the same approach on the card with the next lowest balance and so on until all balances have zeros in them.
Don’t forget: Budget enough money to make at least the minimum payment on each card so you don’t rack up anymore late penalties.
If you’re not confident in your budgeting skills, call a nonprofit credit counseling agency and get some free advice on how to do it. While you’re there, ask whether a debt management program would help push you in the right direction for eliminating credit card debt.
Legal Alternative to Paying Credit Card Debt
Credit cards are an unsecured debt, meaning there is no collateral for lenders to claim if they aren’t repaid. Card companies are taking your word that you will pay what is owed.
If you can’t pay – and have exhausted all other alternative solutions – it may be time to consider debt settlement.
Debt settlement is something that sounds good – “Pay only a fraction of the credit card debt you owe …” – until you do the math and see what “a fraction” really means and what a hit your credit score takes.
Debt settlement involves negotiating a payout with the card company in which they agree to take less than what is owed. It is suggested you have at least 50% of the total available before starting the negotiations. That usually means putting money into a separate account at a time when you already can’t afford to make a minimum payment on your debts.
Your card company will hem and haw and try to battle you, but in the end, they want to get paid something, so they could accept less than what is owed to close out the account.
Unfortunately, this form of debt relief comes with a long-term cost. Your credit score will drop anywhere from 50 to 150 points, depending on where you started from. That will immediately impact the interest rate you’re paying, if you have other credit cards.
It also will put a stain on your credit report that won’t go away for seven years. Anytime you seek credit, whether for a home, car or just another credit card, the lender will see that red light flashing that says you haven’t paid back everything you borrowed. That likely means you will be paying extremely high interest rates, if you get any credit at all.